This is one of the rare posts on this site that is not about investing, wealth building or behavioral finance. And no, it is not a sponsored post either.
I got a phone call from a friend last week. After the usual banter, he got down to the business at hand. He needed my advice given tax season was at hand. “I need to maximize my tax deduction and so need to invest some money. Can you help me identify the right life insurance policy to buy?”
Normally I would point out that analyzing and investing in equities did not make me an expert on tax, but given this was coming from someone who until a few years ago thought tax returns were when the government paid you back your taxes, I figured I could at least add some value by pointing out that buying insurance is not the same as investing.
Buying any kind of insurance should not be about taxes but about the nature of the risk of financial loss you’re protecting against. The higher the potential loss, the more important it is to manage the risk. A good example of this is disability insurance, if you work in an environment where you’re likely to develop an illness or suffer an accident that leaves you out of work for a long period of time then getting a disability insurance quote may help. The risk is higher so the protection can be considered reasonable.
Having established that he already had substantial term life cover, I asked him “What do you think are the most likely risks you face that would have a significant financial impact?”
After a pause, he rattled off a few, in no particular order; accidental loss of life leading to financial difficulty for his family, serious accident leading to loss of limb, critical chronic or terminal illness, losing his owned apartment to a natural disaster, being burgled of his possessions, medical procedure for non life-threatening conditions, liability from being involved in an automobile accident that would require a las vegas car accident attorney or similar…
When he trailed off, I asked him to now consider two things for each of those risks, the likelihood of the risk becoming a reality and the financial impact if it did. Here, I reminded him, it’s important to consider the costs incurred but also any income lost as a result.
One way to do this exercise would be to look for detailed historical statistics on the occurrence of those risks in the general population, narrow down to people who met his demographic profile and arrive at precise figure. But given this exercise is about prioritizing the kinds of insurance a 30-something urban professional needs, getting a relative sense of the likelihood is good enough.
He spent a couple of minutes making a few notes, thinking about instances of people in his peer group, then said with conviction,
Unanticipated health problems seem to be the biggest risk to me and my family’s financial health
I agreed. “Let’s see if you can do something to mitigate that risk then, shall we?” The next step was to identify the right one from the plethora of health insurance plans.
“This is where it gets confusing” he said, there are so many companies, each with a bunch of plans. How does one identify the best and most affordable health insurance policy? Surely, this is too important to decide on price alone like on a travel website.
Like any question worth answering, it needs patience in looking for the right information sources and weighing their credibility before making a choice. For example, Mint has a regularly updated feature called ‘Mint Mediclaim Ratings‘ comparing health insurance plans and scoring them on a list of clearly defined criteria like waiting periods by disease, whether they have disease-wise capping, number of years of pre-existing diseases excluded, percentage of claims settled, room rent covered and so on.
“Looks like I have some research to do” he said as we signed off agreed to meet for a drink the next weekend when he was in town.
The hierarchy of insurance needs – Deccan Chronicle
Mint Mediclaim Ratings – Detailed Calculations
Typical cost of treatment of various medical conditions – indianhealthcaretourism.com